Maximizing State Benefits From Public–Private
Partnerships

Executive Summary

In recent years, the state has partnered with the private sector
to finance, design, construct, operate, and maintain two state
infrastructure projects—the Presidio Parkway transportation project
in San Francisco and the new courthouse in Long Beach. Both the
California Department of Transportation (Caltrans) and the
Administrative Office of the Courts (AOC) entered into a
public–private partnership (P3) for these projects in order to
achieve benefits that they might not have obtained under a more
traditional procurement approach (such as design–bid–build). These
potential benefits include greater price and schedule certainty and
the transfer of various project risks to a private partner.

Our analysis, however, generally indicates that the P3 practices
of Caltrans and AOC are not necessarily aligned with the P3 best
practices identified in the research. For example, these departments
did not use clear P3 processes and appear to have selected projects
not well suited for a P3 procurement. In addition, we find that the
analyses done to compare project costs under different procurement
options were based on several assumptions that are subject to
significant uncertainty and interpretation, and tended to favor the
selection of a P3 approach.

Based on our review and findings, we have identified several
opportunities for the state to further maximize its benefits when
deciding to procure a state infrastructure project as a P3.
Specifically, we recommend that the Legislature:

Specify P3 project selection criteria in state
law in order to provide for greater consistency across departments
in terms of how P3s are selected.

Require a comparative analysis of a range of
procurement options (including design–bid–build, design–build, and
P3) for all potential P3 infrastructure projects in order better
determine which procurement option would most effectively benefit
the state, as well as allow the state to better balance the
potential benefits of increased private sector involvement with the
potential risks unique to each project.

Require the existing Public Infrastructure
Advisory Commission (PIAC) to approve state P3 projects in order to
improve the consistency of the state's P3 approval process.

Require PIAC to (1) have a broad mix of
expertise related to P3 and state finance and procurement, (2)
develop additional best practices for the state's use of P3s, and
(3) evaluate other state departments to determine if they would
benefit by having P3 authority.

Introduction

A partnership between the state and the private sector is
sometimes used to finance, design, construct, operate, and maintain
state infrastructure projects (such as highways, mass transportation
systems, and state buildings). Such a P3 requires the state and the
private sector to collaborate when making decisions about a project.
By bringing external resources and specialized expertise to a
project, the state is expected to achieve certain benefits from a P3
that typically are not achievable when using a more traditional,
public sector procurement approach.

In recent years, California has entered into P3s with private
partners for two state infrastructure projects. Specifically, to
build and operate the Presidio Parkway transportation project in San
Francisco (also known as Doyle Drive) and to build and maintain a
new courthouse in Long Beach. Each of these agreements is for a
period of about 30 years. The combined estimated cost to the state
for both of these projects is about $3.4 billion. Given their
significant cost and the limited experience the state has had in
such partnerships, we identify in this report best practices for the
state to follow when using P3s and present recommendations for
maximizing the benefits to the state. In preparing this report, we
met with representatives from various state departments about their
experiences with P3s, as well as numerous P3 experts. We also
reviewed the literature regarding best practices for implementing
such partnerships.

Background

State Procures Infrastructure Projects in Various Ways

State law specifies the processes for reviewing and approving
proposed state infrastructure projects. In most instances, such as
for court facilities and state office buildings, the Legislature
must approve and appropriate funds for a state project. (They also
must receive approval from the State Public Works Board at various
subsequent stages.) However, the California Transportation
Commission (CTC) approves most state projects related to
transportation. The review and approval process for state projects
generally involves determining (1) the need for the project, (2) how
the project fits into existing infrastructure systems, (3) the
project's priority relative to other state infrastructure projects,
and (4) how the project will be funded. This process typically
consists of multiple reviews and approvals as a project's
development moves from concept to environmental review and
preliminary engineering, and then to design and construction.

State law specifies three general types of procurement
approaches—design–bid–build, design–build, and P3—that state
departments can use to deliver infrastructure projects that have
been approved for construction. As summarized in Figure 1, each of
these procurement approaches involves varying ways of contracting
with the private sector for a project. We discuss each approach
in more detail below.

Design–bid–build. State departments can
use a design–bid–build approach to procure all types and sizes of
infrastructure. Under this approach, the work for each stage of a
project is performed separately. For example, a state department
will generally first award an architectural/engineering contract to
design the project based on subjective criteria of qualifications
and experience of the architect/engineer. In some cases, however,
state staff may design the project. After detailed project plans and
drawings are completed, the department then selects a contractor to
perform the construction work. Construction contracts are awarded
objectively based on competitive bidding, with the contract going to
the qualified bidder who submits the lowest price. Once construction
is completed, the state department is responsible for operating and
maintaining the facility. The state pays for the cost of
design–bid–build projects either up front with state funds or over
time by selling general obligation bonds or lease–revenue bonds.

Design–build. Under existing state law,
certain departments can use design–build procurement. With
design–build, the department typically contracts with a private
general contractor to both design and build the infrastructure
project. The department does not separately contract with an
architect/engineer for design. Rather, the general contractor is
responsible for subcontracting with other entities for design and
various construction work. The state awards a design–build contract
through a competitive bidding process that evaluates factors such as
price, design features, construction schedule, and community or
environmental outcomes. Under design–build, the state maintains
responsibility for financing, operating, and maintaining the
project.

Alternatively, another type of design–build involves the state
transferring design and construction risks to a specialized
construction manager, rather than a general contractor. This
approach is commonly referred to as "construction manager at risk
procurement." With construction manager at risk, the state awards a
contract based on a fee. The construction manager designs the
project and solicits bids from subcontractors and suppliers. The sum
of these bids, along with a surcharge, determines the total price
the state pays for the project.

P3s. Current state law authorizes three
state departments—Caltrans, AOC, and the High–Speed Rail Authority
(HSRA)—to use some form of a P3. While there can be varying degrees
of P3s, the type of P3 often discussed and most recently used in
California is when a single contract is entered into with a private
partner (often a consortium of several companies) for the design,
construction, finance, operation, and maintenance of an
infrastructure facility. For the purpose of this report, we
generally define a P3 as the contracting with the private sector to
design–build–finance–operate–maintain an infrastructure project. (As
we discuss in the nearby box, the state can also enter into
partnerships with other public entities, such as counties, for the
procurement of state infrastructure.)

State Partnerships with Other Public Entities

In addition to the private sector, the state can utilize
other public entities (such as a county or other public
authorities) for the design, construction, operation, and
maintenance of an infrastructure project. In such cases,
however, these entities typically subcontract (either through a
single contract or multiple contracts) with the private sector
to perform much of the actual work on a project. For example,
the public partner could finance a project with municipal
financing, contract with a private company for design and
construction work, and have separate contracts with other
companies to maintain and operate the infrastructure facility.

An example of a public–public partnership project is "The
Toll Roads" in Southern California—a 50 mile network of tolled
state highways in southern Orange County built by the
Transportation Corridor Agencies (TCAs), which are led by
locally elected officials. In 1987, the Legislature authorized
the TCAs to design, construct, finance, operate, and maintain a
portion of the state's highways and to fund the cost of the
project with tolls. The TCAs contracted with private companies
to perform most of the work on the project.

Under a P3 approach, the state can transfer a significant amount
of responsibility associated with a project to the private sector.
For example, the private partner will generally make design and
construction decisions and be responsible for paying the costs to
resolve any construction issues in order to ensure that the project
is completed on time. In addition, the partner will often be
required to finance the project, which generally includes the costs
of design and construction staff, materials, and construction
equipment. However, in order for a private partner to be willing to
finance these costs, the contract must specify a mechanism for
repaying the partner. In many cases, this involves a revenue source
created by the project (such as a toll or user fee on the
infrastructure facility), with the private partner taking on the
risk that the projected revenues will materialize at the level
anticipated. Alternatively, the state can commit to making annual
payments to the partner from an identified funding source, such as
tax revenues. Since it can take many years for a revenue source
(such as a toll on a road) to pay off the private financings, the
terms of P3 contracts generally range between 25 years to 100 years.

The P3 procurement approach is typically more complex than
design–bid–build and design–build. For instance, under a P3
approach, the state must first evaluate a pool of potential bidders
to determine if they have the qualifications necessary to design,
build, finance, operate, and maintain the infrastructure facility.
Then, qualified bidders submit proposals that the state evaluates in
order to select a preferred bidder. A P3 contract is often awarded
to the bidder deemed to provide the best value.

Three State Departments Authorized to Use P3s for
Certain Projects

As shown in Figure 2, existing state law authorizes the use of
P3s for certain transportation and court construction projects.
(State law also authorizes certain local governments to use P3s for
local infrastructure projects.) Below, we discuss in more detail the
specific P3 authority provided to state departments.

Figure 2

Summary of State Public–Private
Partnership (P3) Authority

State Department

Type of
Infrastructure

State
Law

Brief
Description

Projects To Date

Caltrans

Highways

Chapter 107, Statutes of
1989 (AB 680, Baker)

Allowed Caltrans to enter
into up to four P3s.

State Route (SR) 91 and SR
125

Caltrans and regional
transportation agencies

Highways, local roads, and
transit

Chapter 2, Statutes of 2009
(SB 2X 4, Cogdill)a

Allows Caltrans and regional
agencies to enter into an unlimited number of P3s
through 2016.

a
Replaced the P3 authority previously provided to
Caltrans under Chapter 107.

Caltrans. Chapter 107, Statutes of 1989
(AB 680, Baker), authorized Caltrans to enter into P3 agreements for
up to four projects. Under this authorization, as well as that
provided in related follow–up legislation, Caltrans built ten miles
of tolled express lanes in the median of the existing State Route
(SR) 91 in Orange County. In addition, the department built SR 125
in San Diego County that connects the area near the Otay Mesa border
crossing with the state highway system. For each project, Caltrans
used a single contract with a private partner to design, construct,
finance, operate, and maintain the facility. (We discuss these two
projects in more detail later in this report.)

In 2009, Caltrans' authority to enter into P3 agreements was
expanded. Specifically, Chapter 2, Statutes of 2009 (SB 2X 4,
Cogdill), authorizes Caltrans and regional transportation agencies
(such as the Los Angeles County Metropolitan Transportation
Authority) to enter into an unlimited number of P3 agreements for a
broad range of highway, road, and transit projects through December
31, 2016. However, the legislation specifies that such P3 projects
must achieve one or more objectives as determined by the CTC, which
is responsible for programming and allocating funds for the
construction of highway, rail, and transit improvements. These
objectives include:

Improve travel times or reduce vehicle hours
of delay.

Improve transportation operation or safety.

Provide quantifiable air quality benefits.

Meet a forecasted demand of transportation.

In addition, the above agreements are subject to a 60–day review
by the Legislature and PIAC before Caltrans can sign them. The PIAC
is an advisory commission created by Chapter 2 and chaired by the
Secretary of the Business, Transportation, and Housing (BT&H)
Agency. Specifically, PIAC is charged with assembling research, best
practices, and lessons learned from transportation P3s around the
world. The commission can, upon request, assist Caltrans and
regional transportation agencies with P3 project selection,
evaluation, procurement, and implementation. Currently, PIAC
consists of about 20 volunteer members and is staffed within
existing BT&H Agency resources.

In January 2011, Caltrans entered into its first P3 under Chapter
2 for the Presidio Parkway project. This particular P3 requires the
private partner to complete the second phase of the design and
reconstruction of the southern approach to the Golden Gate Bridge
and to operate and maintain the roadway for 30 years. In exchange,
the state will make payments estimated to total roughly $1.1 billion
to the private partner over the life of the contract.

Judicial Council and AOC. Under current
law, the judicial branch is authorized to use P3s. In addition,
state law requires the Judicial Council (the policy making body for
the judicial branch) and their staff in the AOC to develop
performance standards to facilitate the review of P3s and requires
the Department of Finance (DOF) to review projects that include a P3
component. The legislation also specifies that AOC may only proceed
with a P3 if the Legislature does not object to the performance
standards adopted for the project.

The 2007–08 Budget Act directed AOC to gather
information regarding the possible use of a P3 for the replacement
of the Long Beach courthouse. In December 2010, AOC entered into a
P3 that requires a private developer to finance, design, build,
operate, and maintain the Long Beach courthouse over a 35–year
period in exchange for payments from the state totaling $2.3
billion. At this time, the Long Beach courthouse is the only project
that the AOC has procured using a P3.

The HSRA. Chapter 796, Statutes of 1996
(SB 1420, Kopp), created the HSRA and authorized it to use P3
procurement for the development of a High–Speed train system
connecting northern and southern California. However, state law does
not establish a specific process for reviewing or approving P3s for
HSRA. State law requires capital expenditures by HSRA to be approved
by the Legislature. Based on the authority's 2012 business plan, the
HSRA would not award its first P3 contract until 2023.

Benefits and Limitations of P3s

Government entities typically use P3s to achieve benefits that
they may not be able to obtain under a more traditional procurement
approach (such as design–bid–build). However, P3s can also introduce
new limitations and costs as summarized in Figure 3 and described in
detail below.

Potential P3 Benefits

Transfers Project Risks to Private Partner.
The P3s can transfer risks associated with a project from a
government entity to a private partner. Figure 4 summarizes the
major risks that could potentially be transferred, such as those
related to financing, operation, and maintenance. As indicated in
the figure, the most significant risks are associated with the
design and construction of a project. For example, under a P3
approach, the private developer would bear the risks and costs if
the design of the project were changed to fit certain site
conditions (such as soil quality or the discovery of archeological
artifacts). Similarly, the private partner would be responsible for
project cost overruns, which can be very expensive. The transfer of
this risk could reduce or eliminate the need for additional public
funds to complete a project. Moreover, the partner would bear the
risk if the actual revenue collected from any tolls or user fees are
less than projected, which depending on the project, can be
significant. In order to ensure adequate compensation, private
developers attempt to estimate the anticipated costs of resolving
issues on the risks they assume and factor these costs into their
bid. However, in some cases, the developer may be better equipped to
manage certain risks at a lower cost than if the government retained
all of the project risks.

Greater Price and Schedule Certainty.
Based on a survey conducted by the Federal Highway Administration
(FHWA), governments around the world reported that P3s can provide
better price and schedule certainty for the design and construction
of a project compared to a more traditional procurement approach
(such as design–bid–build). In part, this is because P3s allow a
government entity to share certain risks with a private developer
who has more experience with a particular type of project and has
developed strategies to mitigate potential cost increases that could
result from such risks. The government can also achieve greater
price certainty from P3s because, as is the case with design–build
and construction manager at risk contracts, the contacts often have
a maximum price. This means that the private partner must pay for
any cost increases above the agreed upon price. In addition, the
government typically sets up a streamlined process to review the
design and construction decisions made by the partner, which can
help prevent delays in the project schedule. Moreover, P3s that
include financing can incentivize the partner to complete the
project on time and receive the necessary funding (such as payments
from the government or revenues from project user fees) to repay the
private loans taken out to finance the project.

More Innovative Design and Construction Techniques.
Experts in P3s generally believe that the private sector is often
better able to develop innovative project designs and construction
techniques than government entities. In part, this may be due to the
specialized expertise that a private partner can bring to a project.
Greater design and construction innovation could result in a variety
of potential benefits, including lower project costs, a higher
quality project, shorter construction schedules, and enhanced
project features.

"Free Up" Public Funds for Other Purposes.
In general, using a private developer's access to capital can free
up government funds to advance the construction of other
infrastructure in the near–term and, thus, provide the public with
access to improved infrastructure sooner than planned. In addition,
the developer's financing can sometimes provide more advantageous
repayment terms than a government might typically obtain under a
more traditional public financing approach. For example, if
repayment were extended over a longer period of time than the
government typically has to repay borrowed funds, it could reduce
the amount that must be repaid each year. Such freed–up public funds
could then be allocated for other purposes.

Quicker Access to Financing for Projects.
In addition, by making a private developer responsible for financing
a particular project, a government might be able to access financing
in cases where it does not yet have the authority to borrow. For
example, California's constitution requires voter approval prior to
selling certain types of bonds to finance infrastructure projects,
which could delay the state from accessing financing for certain
projects. However, projects financed through a P3 would not require
voter approval, potentially allowing some projects to start
construction sooner.

Higher Level of Maintenance. Due to
insufficient funding for maintenance, as well as how existing
maintenance funding is prioritized, some governments currently do a
poor job in maintaining their infrastructure. For example, due to a
lack of regular maintenance, only 28 percent of California's
highways are in good condition. As a result, many highways require
costly major rehabilitation or replacement. Under a P3 approach, a
government could require the private partner to maintain the
constructed infrastructure to specified standards. Essentially, this
means that P3 facilities could remain in good condition over longer
periods of time, thus allowing the government to delay the cost of
major rehabilitation or replacement.

Keeps Project Debts Off the Government's "Books."
Another benefit of P3 financing is that the debt incurred by a
private partner for a project may not be counted as government debt.
In other words, P3 financing may not appear as debt on government
balance sheets. According to recent studies by the FHWA and the
United Nations Economic Commission for Europe, this is one of the
reasons why some countries in the European Union have chosen to use
P3s. While the benefit of debt not appearing on the government's
balance sheet is probably more important to governments subject to
strict limitations on debt, it could also improve the overall
ability of some governments to borrow funds for other purposes.
However, since California does not have such strict debt limitations
that restrict its options for financing infrastructure projects this
benefit does not currently apply to the state.

Potential P3 Limitations

Increased Financing Costs. Financing a
project through a P3 is likely to be more expensive than the
financing options typically used under the more traditional
procurement approaches (such as obtaining state and federal loans).
This is because private companies typically pay higher interest
rates than government entities to borrow money. For example, a study
of P3 projects in Canada found that private partners typically pay 1
percentage point higher on loans compared to the governmental cost
of borrowing. In times of limited access to financial markets (such
as the financial crisis of 2008), the cost difference between
private and public borrowing was 2 percentage to 3 percentage
points. In addition, private companies will often seek to earn a
profit of roughly 10 percent to 25 percent when loaning funds to a
government, which can further increase P3 financing costs.

Greater Possibility for Unforeseen Challenges.
As previously discussed, in comparison to design–bid–build and
design–build contracts, P3 contracts cover a much longer time period
and scope of activities (such as maintenance of the infrastructure
facility). Thus, there is a greater possibility for unforeseen
issues to arise under a P3 approach. Such issues could include
disputes regarding certain terms in the contract, as well as the
private partner being acquired by another company or going out of
business, effectively resulting in project schedule delays and
additional costs to the government.

Limits government's Flexibility. The
long–term nature of P3s can also "lock in" certain government
funding priorities based on operational needs determined at the time
the contract is negotiated. This can make it difficult to change
funding allocations to reflect changes in government priorities. For
example, a P3 contract may require litter and graffiti to be removed
from a highway within three days. Renegotiating the terms of this
contract to use the funds designated for prompt litter and graffiti
removal to support another activity or project could be very
difficult. In addition, by bundling multiple phases of a project
into a single contract, P3s can make it more difficult for the
government to change how a project is managed. For example, if the
government wanted to make changes to how a private partner handled
customer complaints and questions on a toll road, it would likely
need to propose amendments to the contract, which could increase the
project's overall cost.

New Risks From Complex Procurement Process.
As discussed earlier, the procurement process for P3s is more
complex than the procurement processes traditionally used for state
infrastructure projects (such as design–bid–build and design–build).
In addition to a project's design, construction price, and schedule,
under P3 approach, the government entity must also evaluate
proposals based on financing, operations, and maintenance. In
addition, P3 procurements can also involve complex negotiations
between the government and the private developers who bid on the
project. As a result, P3s can require the government to perform new
activities and take on certain risks that it may not be experienced
at handling. For example, if the state does a poor job of drafting
agreements or fails to address relevant issues in these agreements,
it could experience unexpected costs or receive lower levels of
service than planned.

Fewer Bidders. According to the
research, infrastructure projects that are relatively expensive and
complex tend to be more ideal candidates for P3s. In addition,
private partners tend to be comprised of multiple companies who
coordinate efforts to develop a P3 bid—each with expertise in a
particular component of the project (such as design and
construction, financing, or maintenance). As a result, few private
developers have the financial resources and technical skills to
compete for P3 projects, especially on their own. According to
experts, P3 projects typically receive between one and three bids.
In comparison, similarly sized projects procured under traditional
public sector approaches typically receive a greater number of bids.
Less competition for a project procured as a P3 could be detrimental
to the government, as more competition for a project generally
reduces the price of a project while increasing its quality.

Some Benefits Achieved to Date

In order to determine whether the state has achieved some of the
intended benefits of P3s, we reviewed the two completed P3 projects
procured by the state'sR 91 Express Lanes and SR 125 Tollway. At the
time of this analysis, however, Caltrans was unable to provide us
with the necessary data to evaluate whether the P3 projects
completed by the state—SR 91 and SR 125—resulted in greater price
and schedule certainty than if the projects were procured under a
more traditional approach. As a result, we reviewed recent state
projects that, while not considered P3s, transferred certain risks
and responsibilities to the private sector. Specifically, we
reviewed those projects procured under design–build and construction
manager at risk contracts. These particular projects are summarized
in Figure 5.

Figure 5

Design–build and Construction Manager
at Risk: Cost and Schedule Outcomes

Project

Implementing Agency

Type of
Procurement

Project Completion

Percentage Price Increase From Contracta

SR 73 Toll Road

TCAs

design–build

4 months early

—

SR 241, SR 261, and SR 133
Toll Roads

TCAs

design–build

14 months early

—

SR 22 Carpool lanes

OCTA

design–build

1 week late

4.6%

Contra Costa Justice Center

AOC

Construction manager at risk

1 week early

1.2

Fresno Court Facility
Renovation

AOC

Construction manager at risk

1 month late

0.2

State Office Building in
Oakland

DGS

design–build

On schedule

—

San Francisco Civil Center

DGS

design–build

On schedule

1.2

State Office Building in Los
Angeles

DGS

design–build

3 months late

7.3

State Office Buildings in
Sacramento

DGS

design–build

On schedule

10.4

Caltrans Office Building in
Los Angeles

DGS

design–build

15 months late

5.2

Caltrans Office Building in
Marysville

DGS

design–build

On schedule

3.0

Central Plant Renovation in
Sacramento

DGS

design–build

4 months late

0.6

a
Excludes cost of changes requested by the
implementing agencies, such as increases to the
contractors' scope of work.

Price and Schedule Certainty Generally Achieved.
In terms of the projects reviewed, most of them were generally
successful at staying on budget and schedule. When there were
schedule and cost overruns, they were typically relatively small.
For example, three–fourths of the projects opened to users on
schedule or within one month of the planned deadline. Three–fourths
of the projects were also completed on budget or with less than 5
percent in cost overruns. While there is no way of knowing what the
price and schedule outcomes would have been if these projects were
procured differently (such as a design–bid–build project), the
projects were generally successful at meeting the goal of price and
schedule certainty.

Mixed Results During Operations. The SR
91 Express Lanes and the SR 125 Tollway both experienced problems
during the operational phases of their P3 contracts. Specifically,
while both facilities remained open to the public, Caltrans incurred
additional costs resulting from disputes with its private partners.
For example, the SR 91 contract contained a "non–compete clause"
that prohibited Caltrans or other public agencies from competing
with the tolled lanes built by the private partner. Thus, if public
agencies made any improvements to transportation facilities in the
SR 91 corridor (including minor projects to improve the safety of
the general–purpose lanes of the highway), the private partner
believed that the state would be required to compensate for the loss
of toll revenue if fewer people drove on the tolled P3 lanes due to
these improvements. The issue was litigated in court, but was
ultimately settled when the private partner agreed to sell the
rights of the express lanes to the Orange County Transportation
Authority (OCTA), a local public transportation agency. Since OCTA
assumed control of SR 91, Caltrans has not had any conflicts
regarding the non–compete clause.

The SR 125 project experienced legal challenges that delayed its
completion. Such challenges made the partnership less profitable for
the private partner. Specifically, the lawsuit alleged that
Caltrans, as a partner in the agreement, was partially liable for
losses claimed by some of the private companies involved in the
project. The private partner ultimately declared bankruptcy, with
the court awarding the rights to the remainder of the P3 to a group
of lenders who had financed the project. This group subsequently
sold the agreement to the San Diego Association of Governments.

Given the nature of design–build and construction manager at risk
contracts, the other projects we reviewed did not transfer
responsibility for operating the infrastructure facility to a
private partner after it was built. However, the toll road projects
involving SR 73, SR 241, SR 261, and SR 133 did involve other public
entities being responsible for operating the facilities. This
network of tolled public highways in Orange County (commonly
referred to as "The Toll Roads") are managed by the Transportation
Corridor Agencies (TCAs), which are public agencies led by locally
elected officials. While the TCAs may contract with private
companies to operate the toll roads, they are ultimately responsible
for making key decisions and directly managing the contracts. When
the TCAs encountered problems after the highways became operational,
they were able to end a contract with a private operator who was not
meeting expectations and later rebid the work to a different
company. Using separate contracts and retaining more responsibility
for making key decisions helped avoid some of the unforeseen costs
(such as legal costs) that were incurred with the state's P3
projects.

P3 Best Practices

As part of our examination of the P3 approach, we reviewed
international research and interviewed experts in the field. Based
on our review, we identified a set of best practices that have been
found to maximize the potential benefits of P3s and minimize its
potential limitations. These best practices are summarized in Figure
6 and discussed in more detail below.

Establish Overall P3 Policy and Implement Transparent
Processes

Experts recommend that governments adopt an overall P3 policy to
(1) guide decision–makers when evaluating different procurement
options and (2) inform potential private partners and the public of
the process. For example, experts recommend having a transparent
process so that potential partners are aware of the specific
requirements that must be satisfied to bid on a project and how long
the procurement process will likely take. Such transparency also
helps stakeholders and the public understand how and why a
government entity selected a private company to build or operate
public infrastructure. For example, Virginia created the Office of
Transportation public–private Partnerships to develop a consistent
institutionalized process for P3 procurements, in order to help
attract qualified developers and contractors.

Adopt Criteria to Determine Good Candidates for P3
Projects

International research also finds that it is good practice for
governments to adopt criteria for determining whether projects would
be a good fit for P3 procurement, as not all public infrastructure
projects would benefit from a P3 approach. For example, as we
discuss later in this report, the Legislature could establish
criteria that provide a reasonable means of screening potential P3
projects. Such criteria should not be too prescriptive or
cumbersome. Experts recommend that the screening criteria include
the following:

Government Benefit From Using
Nonpublic Financing. The screening process should
determine if there is a benefit (such as completing the project
sooner) to the government from financing the project with a private
partner, rather than using public funds upfront to pay for the
project. Typically, relatively expensive projects—with costs
ranging from the hundreds of millions to billions of dollars—are
more likely to benefit from private financing, as it can take
several years to save up enough funds to build a large project
without financing or to get approvals for public financing.

Technically Complex.
Generally, projects that are technically complex are more likely to
benefit from the innovation or specialized expertise that is
typically associated with P3s. For example, a private partner with
extensive experience designing and building tunnels or bridges may
be able to construct a complex tunnel or bridge more quickly and/or
at a lower cost. On the other hand, projects that are very simple
(such as repaving a road) are not as well suited for the P3 approach
because they are less likely to benefit from innovation and
specialized expertise.

Ability to Transfer Risks to
Partner. Projects that are good candidates for P3s
generally have significant known risks that the government can
transfer to a private partner. For example, a project that is in the
very early stages of development and does not have a completed
environmental review may lack sufficient information to allow for an
effective transfer of risk. Given these unknown risks, potential
partners may be hesitant to bid on the project or may incorporate
large premiums into their bid. Alternatively, a project with clearly
identified risks (such as if a toll road will generate enough
revenue to finance the project) would be more well–suited as a P3.

Revenue Source to Repay Financing.
As discussed above, P3s require a revenue source to repay the
financing provided by the private partner. Ideally, a project would
have a dedicated revenue source (such as a toll or user fee) to
repay the money borrowed from the partner. The government entity,
however, could commit to make payments to the partner from
government funding sources, such as tax revenues.

Conduct a Rigorous Value for Money Analysis

Once it is determined that a particular project is a good P3
candidate, experts recommend that the government entity perform a
detailed analysis that compares the project's costs using a P3 to
using a more traditional procurement approach. A commonly used
analysis is a "value for money" (VFM) analysis, which identifies all
the costs of a project (such as the design, construction, and
operation and maintenance of the facility) over the life of the
project or the term of the lease with the private partner. These
costs are then "discounted" over time to determine the project's
cost in net present value. In other words, because the expenditures
take place over several decades and the timing of the expenditures
differ between a P3 approach and the more traditional procurement
approach, the comparisons are adjusted to account for the fact that
money available at the present time is worth more than money
available in the future. Specifically, the VFM analysis should
compare the cost of the different procurement approaches in net
present value terms of delivering the same level of service—both
in terms of the quality of the infrastructure constructed and the
quality of the maintenance and operation services provided.

The VFM analyses can be complex and the underlying assumptions
can significantly influence the outcomes. Thus, most experts
recommend specifying parameters for the assumptions (such as for the
discount rate) so that all potential projects are evaluated with
similar criteria.

Adopt and Implement Project Approval Process

Experts recommend maintaining a process to approve projects for
P3 procurement that allows good candidates to proceed. The approving
entity (such as the Legislature or an independent board), which is
typically separate from the agency sponsoring the project, should
verify that (1) the project satisfies most of the established P3
criteria and (2) the VFM analysis shows that a P3 procurement is the
best option. In addition, P3 experts recommend obtaining project
approval prior to having potential partners bid on the project. This
is because private developers may not bid on a project if they are
unsure whether the approving entity might stop it from moving
forward.

Establish Government Expertise in P3s

Another P3 best practice is for government entities to develop
expertise regarding P3s, in order to better protect public resources
when entering into large contracts with private partners.
Experienced departmental staff can make it easier for the state to
handle P3 workload quickly and thoroughly, as well as effectively
communicate with the private sector. Governments could use private
consultants to help with this workload.

Our research also found that P3 expertise can reside at multiple
levels of government. For example, PPP Canada provides information
and assistance to Canada's provincial and municipal governments on
the use of P3s. At the provincial level, Partnerships BC in British
Columbia provides specialized services, such as managing projects
and facilitating communication with the private sector. In addition,
experts recommend reviewing the outcomes of P3 projects at various
stages to allow a government entity to determine what worked well
and what problems were encountered on each project. The lessons
learned can be used to inform future P3 procurements.

State's Use of P3s Falls Short of Best Practices

As we discussed earlier in this report, existing state law
authorizes Caltrans, AOC, and the HSRA to use P3s to procure certain
types of infrastructure. In analyzing their use of this authority,
we generally found that the practices of Caltrans and AOC are not
necessarily aligned with P3 best practices. (At the time of this
report, HSRA had not entered into any P3 contracts.) For example,
our analysis indicates that these departments did not use clear P3
processes and appear to have selected projects not well suited for a
P3 procurement—meaning the Presidio Parkway project and the Long
Beach courthouse project. Our findings regarding each of these
projects are summarized in Figure 7 and described in detail below.

State Lacks Transparent P3 Processes

As discussed above, having clearly defined and transparent P3
processes is considered a best practice. However, our review found
that the state's use of P3 procurement for the Presidio Parkway and
Long Beach courthouse projects lacked transparent frameworks and
clear processes.For example, when
Caltrans used a P3 procurement for the Presidio Parkway, the
department lacked a transparent framework for selecting the project
and conducting a VFM analysis. It did not release a draft P3 program
guide until December 2011, one year after signing the agreement for
Presidio Parkway. While the guide addresses many procedural
questions regarding the department's future use of P3s, it does not
establish a consistent process for evaluating potential P3 projects
through the use of a VFM analysis. We think this is a significant
shortcoming of the guide because establishing VFM processes and
parameters is important to ensure that projects are evaluated on a
consistent basis using reasonable assumptions. The Caltrans draft P3
program guide also does not address how project evaluation, review,
and procurement responsibilities will be carried out when the state
partners with local transportation agencies. Specifically, the guide
does not lay out how the lead agency will be determined and which
entity is responsible for certain tasks, such as review and
oversight. As a result, various local agencies that we talked to
appear to have different understandings of what will be required of
them for P3 projects.

Similarly, AOC did not use a transparent framework in selecting
the Long Beach courthouse to be a P3 project. For example, AOC did
not develop guidelines for selecting potential P3 projects and
conducting VFM analyses. More importantly, at the time of this
report, AOC had not developed transparent criteria or processes for
determining potential P3 projects in the future. For example, it is
unclear how AOC will identify projects that are likely to benefit
from a P3 approach and evaluate potential projects through the use
of VFM analyses.

Selection Criteria for Recent Projects Not Aligned to
Best Practices

Our analysis indicates that the processes used to identify the
two recent state projects for P3 procurement—the Presidio Parkway
and the Long Beach courthouse—included few of the best practice
criteria.

Presidio Parkway Selection Was Problematic.
According to Caltrans staff, the Presidio Parkway project was
selected as a P3 candidate primarily based on two criteria: (1) an
estimated project cost of more than $100 million and (2) a completed
environmental impact review. However, according to the identified
best practices, these two factors alone do not constitute a robust
set of screening criteria. In other words, the selection process for
the project did not include such recommended criteria as the ability
to transfer risk to the private sector and whether the state would
benefit from using non–state financing. While the selection process
for a P3 project does not need to include all of the best practice
criteria, including such criteria does help ensure that the intended
P3 benefits are achieved. Our analysis indicates that if Caltrans
utilized such criteria in its selection process, the Presidio
Parkway project would have been found to be inappropriate for P3
procurement.

For example, the Presidio Parkway project was too far along to
transfer many of the project's risks to a private partner. This is
because the Presidio Parkway's first phase of construction was
already underway using a design–bid–build procurement when the
second phase of the project was selected for P3 procurement. As a
result, potential private partners had limited access to the
construction site, which in turn made them less willing to take on
many of the project's construction risks. For example, the state
retained significant risks regarding the discovery of archeological
artifacts and endangered species. In addition, Caltrans had already
designed about half of the project's second phase prior to awarding
the P3 contract. Thus, the winning bidder may be limited in its
ability to find cost–savings through innovative design and
construction techniques because it must adhere to certain
specifications it did not design.

Long Beach Courthouse Selection Was Problematic.
According to AOC staff, the Long Beach courthouse project was
selected as a P3 candidate based primarily on two criteria: (1) it
was one of the largest court construction projects considered at
that time and (2) the Long Beach area has a competitive market for
the type of property management staff needed to operate a P3.
Similar to the selection of the Presidio Parkway project, the
selection process for the Long Beach courthouse project did not
include much of the recommended best practice criteria. For example,
the selection process did not evaluate whether the project is
technically complex. While the ideal level of complexity for a P3 is
difficult to define in specific terms, the Long Beach courthouse
project lacks unique or complex features that would likely benefit
from innovative design and construction techniques. Accordingly, our
analysis indicates that if AOC utilized best practice criteria in
its selection process, the Long Beach courthouse project would have
been found to be inappropriate for P3 procurement.

VFM Analyses Based on Assumptions That Favored P3
Procurement

As described above, VFM analyses can help decision–makers compare
the cost of a project under different procurement options. Both
Caltrans and AOC contracted with private consultants to perform such
analyses for the Presidio Parkway and Long Beach courthouse
projects. Specifically, the analyses compared the costs of
constructing the project under a more traditional approach to a P3
approach. The VFM analyses found that the state would benefit
financially if the Presidio Parkway and Long Beach courthouse
projects were procured as P3s—meaning it would be cheaper to have a
private developer build and operate the planned facility. Our review
of these particular analyses, however, indicates that both VFM
analyses were based on several assumptions that are subject to
significant uncertainty and interpretation and tended to favor a P3
procurement. If a series of different assumptions were made, the VFM
analyses would have shown that the P3 procurement on the Presidio
Parkway and Long Beach courthouse projects would be more expensive
in the long run than a more traditional procurement.

Assumptions in Presidio Parkway Analysis Favored P3.
Some of the key assumptions made by Caltrans in the VFM analysis of
the Presidio Parkway project that tended to favor P3 procurement
include:

Relatively High Discount Rate.
In order to calculate the net present cost of the project, Caltrans'
VFM analysis discounts the cost of the project under a traditional
approach and a P3 procurement by 8.5 percent per year. As discussed
above, this adjustment is intended to reflect that money spent in
the near term is more valuable than money spent in the future. In
the past, our office has suggested that a 5 percent discount rate be
used for such analyses, but acknowledges there is no one "right"
discount rate. We also note that the state's long–term borrowing
rate is currently less than 5 percent.

Unjustified Tax Adjustment.
The VFM analysis for this project also included a $167 million
adjustment in order to account for increased tax revenues (such as
from corporate taxes) that the private developer would pay to the
state under the P3 approach. The analysis assumed that if the
project was not procured as a P3, the state would not receive these
additional revenues. However, we found the adjustment included
mostly revenues related to potential federal taxes, which would not
directly benefit the state. Thus, the adjustment made a P3 approach
look more favorable than is warranted.

Assumed Early Payment of Cost
Overruns. Under a more traditional procurement
approach (such as design–bid–build), Caltrans assumed the Presidio
Parkway project would exceed its budget by $125 million and that
such cost overruns would need to be paid for at the start of
construction. However, such overages do not typically occur at the
start of a project, but rather as a project progresses through
construction. While some consideration of the potential for cost
overages is reasonable, Caltrans' method relies on subjective
judgment rather than objective evidence. Consequently, the chosen
method has the effect of overstating the net present cost of the
project under a traditional procurement approach, thereby favoring a
P3 procurement approach for the project.

Failed to Account for Competitive
Bidding Environment. The Caltrans' VFM analysis, which
was prepared in February 2010, also did not take into account the
competitive construction bidding environment that occurred around
that time. During this period, Caltrans awarded construction
contracts that were on average 30 percent below the project's
original cost estimate. While it is not possible to know exactly
what the bids would have been if the Presidio Parkway project had
been procured using a more traditional procurement, it appears
reasonable to assume that the project could have been awarded at a
much lower cost than the engineer's cost estimate.

Our analysis indicates that utilizing a different set of
assumptions (such as a discount rate of 5 percent and excluding the
assumed tax adjustment) would result in the cost of the Presidio
Parkway project being less—by as much as $140 million in net
present value terms—in the long run under a traditional procurement
approach than the chosen P3 approach.

Assumptions in Long Beach Courthouse Analysis Favored
P3. Some of the key assumptions in the VFM analysis of
the Long Beach courthouse that tended to favor P3 procurement
include:

Unjustified Tax Adjustment.
Similar to the Presidio Parkway project, the VFM analysis for the
Long Beach courthouse project included a $232 million adjustment to
account for increased tax revenues that would be paid for by the
private developer under the P3 approach. A major component of this
adjustment reflects revenues from federal taxes. Since additional
federal tax revenues would not directly benefit the state, there
appears to be little to no justification for increasing the cost of
using a traditional procurement approach to reflect the federal
taxes that would be paid by a private developer.

Overstated Cost Overruns.
The VFM analysis assumed that using AOC's more traditional
procurement approach of construction manager at risk—rather than a
P3 procurement approach—would result in construction cost overruns
for the Long Beach courthouse project totaling $128 million (about
30 percent of the project's estimated cost). However, given that AOC
has procedures in place to prevent such cost overages and has not
experienced them with recent court construction projects, this
assumption has the effect of overstating the cost of the project
under a construction management at risk approach.

Leasing of Additional Space.
The AOC's VFM analysis assumes that under the P3 approach, the
courthouse project would include space that would initially be
leased by the private developers to other entities, but could
eventually be used by the court. The VFM analysis also assumes this
additional space would be needed by the court in Long Beach in the
future, and builds the cost of leasing this additional space into
its estimates. This factor adds $260 million in costs to a
traditional procurement of the Long Beach courthouse project, but
only $69 million to the cost of the P3. The higher cost under a
traditional approach assumes that a separate building would be
leased and that the leased building would need substantial
modifications. The analysis for the traditional procurement also
assumes increased costs for security officers to monitor the leased
building. While there is some basis for estimating a higher cost for
the potential need to lease additional space under a traditional
procurement approach, the AOC has not conclusively demonstrated that
all of this additional space would be needed by the court in Long
Beach. Moreover, AOC's other courthouse construction projects
ordinarily do not include this kind of extra space.

Project Completion.
The AOC–s VFM analysis assumes that it would take 14 months longer
to complete the Long Beach courthouse under construction manager at
risk procurement than as a P3 project. Accordingly, the analysis
uses different timelines to discount the costs of the project under
each type of procurement. The way the VFM analysis adjusts for these
assumed differences in timing effectively increases the cost of a
traditional procurement in net present value terms. However, it is
not evident that such a procurement would necessarily take 14 months
longer—especially in view of the considerable flexibility state law
gives AOC with respect to its construction contracting methodology.

Our analysis indicates that utilizing a different set of
assumptions than those discussed above (such as excluding the
assumed federal tax adjustment and leasing costs) would result in
the cost of the Long Beach courthouse project being less—by as much
as $160 million in net present value terms—in the long run under a
traditional procurement approach than the chosen P3 approach.

State Law Lacks Thorough Project Approval Processes

Our analysis found that for both the Presidio Parkway and Long
Beach courthouse projects, the state did not utilize a thorough
process for selecting P3 projects. Having thorough processes in
place could have prevented Caltrans and AOC from entering into a P3
agreement for each project, or at least required changes to
negotiate lower prices and better ensure that the intended P3
benefits are achieved.

For P3 transportation projects, state law requires the CTC to
conduct a limited review of the basic features of each project
sponsored by Caltrans or a regional transportation agency. (We note
that in reviewing the Presidio Parkway project, CTC extended its
evaluation beyond the basic requirements to further review the
project's financing.) However, state law does not require the
commission or another entity to conduct an overall review of whether
(1) the state would benefit from procuring a particular project as a
P3 and (2) whether a particular P3 contract is structured to
maximize the state's benefits. Moreover, while state law does
provide a 60–day period for the appropriate legislative fiscal and
policy committees and PIAC to review P3 proposals before Caltrans
can sign an agreement with a private developer, state law does not
require that Caltrans address any of the concerns raised in these
reviews.

For court construction projects, state law authorizes the Joint
Legislative Budget Committee and DOF to review a potential P3
project before AOC can fully develop the project's concept.
Accordingly, the Legislature reviewed and approved the general
criteria used by AOC to select the private partner for the Long
Beach courthouse project. However, the Legislature did not have an
opportunity to review and comment on the VFM analysis before it was
finalized and the contract was signed with the private developer.

State Lacks P3 Expertise

As previously discussed, experts recommend that government
entities develop expertise regarding P3s in order to better protect
public resources when entering into large contracts with private
developers. Our review, however, finds that such expertise within
state government has not been sufficiently developed in California.

PIAC Has Limited P3 Expertise. The PIAC
was established in 2009 to assemble and share research on best
practices and lessons learned from transportation P3s around the
world. However, based on our discussions with staff at the BT&H
Agency and our review of various PIAC documents (including the
minutes from the seven PIAC meetings that have taken place), we find
that PIAC has done little to implement best practices for
transportation P3s. The only steps that PIAC appears to have taken
in this regard are to post reports containing information on P3 best
practices on its website and to contract for two reports on P3s. We
also note that the commission currently lacks members with in–depth
expertise on issues such as state financing, state procurement, and
state labor issues. Perspectives on these issues could help to
ensure that the state maximizes its benefits when using P3s.

No Systematic Approach for Reviewing Lessons Learned.
Our review also finds that the state does not have a systematic
process for identifying and applying lessons learned from prior P3
projects. Although Caltrans is the only state agency to have entered
into multiple P3 agreements, it currently lacks a formal process for
reviewing past P3 projects in order to maximize benefits and avoid
repeating past mistakes. We understand that AOC is currently
developing a review and reporting process for the Long Beach
courthouse project. Once completed, these reports may provide
helpful lessons learned about AOC's use of P3 procurement.

Recommendations to Maximize State Benefits from P3s

In this report, we reviewed the state's experience with P3s and
identified several instances where the best practices identified in
existing P3 research have not necessarily been followed. Based on
our review and findings, we have identified several opportunities
for the state to further maximize its benefits when deciding to
procure a state infrastructure project as a P3. Our specific
recommendations are summarized in Figure 8 and discussed in detail
below.

Specify P3 Project Selection Criteria

As previously mentioned, the state's processes for selecting P3
projects are inadequate and not necessarily based on selection
criteria identified in the research as best practices. Accordingly,
we recommend that the Legislature adopt legislation requiring that
each state department with P3 authority utilize certain criteria
when evaluating whether a particular project should be procured as a
P3. According to the research, these selection criteria should not
be highly prescriptive, but rather should provide general guidance
regarding the selection of potential P3 projects. Such an approach
would provide for greater consistency across departments in terms of
how P3 projects are selected. The selection criteria should include
being a technically complex project, as well as a project that can
transfer risks to a private partner and benefit from non–state
financing. In addition, the Legislature may want to specify whether
P3 projects must have a revenue source, such as a user fee.

Require Analysis of a Range of Procurement Options

In order to determine which procurement approach would most
effectively benefit the state, we recommend that the Legislature
adopt legislation requiring a comparative VFM analysis of a range of
procurement options (including design–bid–build, design–build, and
P3) for all potential P3 infrastructure projects. Evaluating a range
of procurement options would allow the state to better balance the
potential benefits of increased private sector involvement with the
potential risks unique to each project. In contrast, the benefit of
evaluating only two procurement approaches—as was done by Caltrans
and AOC—can be limited. This is because it does not evaluate other
options (such as design–build), which in some cases may be the best
option.

We also recommend that the Legislature specify in statute that
such VFM analyses:

Exclude Federal Tax Adjustments.
Increased federal tax revenues do not directly benefit the state and
should not be included in a VFM analysis.

Apply Costs to Expected Year of
Expenditure. Project costs should be accounted for in
the year they are likely to be incurred, in order to effectively
estimate the project's likely total cost in the long run.

Use Current Construction Cost
Estimates. Construction cost estimates should be based
on the current bidding environment in the state.

Include a Sensitivity Analysis.
A sensitivity analysis can help to indicate how the results of the
VFM analysis might change with a different set of assumptions.
Specifically, this analysis should evaluate project costs and
revenues with a range of reasonable discount rates to show how
differing assumptions can influence the outcome of the VFM analysis.
If a project will generate revenue, such as from tolls or fares, a
reasonable range of revenues should also be evaluated in the
sensitivity analysis.

Modify Structure and Responsibilities of PIAC

In order to help ensure that PIAC effectively assembles and
shares research, best practices, and lessons learned from
transportation P3s around the world, we recommend the Legislature
adopt legislation to:

Expand PIAC's Authority.
In order to provide a consistent review and approval process for the
use of P3 procurement, we recommend
expanding the PIAC's role to require the commission to approve all
state P3 projects, as discussed in detail later in this report. We
also recommend expanding the scope of PIAC to all types of
infrastructure projects, rather than only those related to
transportation. Having the commission involved in all types of P3
will further the state's P3 expertise. To reflect this broader
scope, we also recommend making PIAC an independent commission,
rather than part of the BT&H Agency.

Direct PIAC to Evaluate Other
Departments for P3 Authority. We have found that
certain types of projects may benefit the state if procured using a
P3. It is possible that state departments other than Caltrans, AOC,
and HSRA will have projects meeting these P3 criteria. Accordingly,
we recommend that the Legislature direct PIAC to review the types of
projects planned by other state departments and recommend to the
Legislature whether P3 authority should be granted to additional
state departments.

Broaden PIAC's Expertise.
In order to ensure that PIAC has the expertise necessary to advise
state departments on all types of P3s, we believe it would be
beneficial for the commissioners to have a broad mix of expertise
related to P3, as well as state finance and procurements.
Specifically, we recommend that the Legislature appoint some of the
commissioners and that, in addition to P3 experts, the
commission include the Director of the Department of General
Services (or a representative), and the State Treasurer (or a
representative). The Legislature could also consider reducing the
number of commissioners on PIAC to a more manageable size.

Require PIAC to Develop and
Implement Best Practices. We recommend requiring PIAC
to (1) develop a set of best practices for P3 projects in
California, (2) provide state departments specific steps for
implementing those best practices, and (3) provide technical
assistance to state agencies planning to pursue a P3. Consistent
with the research, it would benefit the state to have such expert
advice provided from the initial project screening stage through the
procurement and administration of a P3 contract. We also recommend
that the Legislature require periodic reports from PIAC in its
efforts in developing and implementing P3 best practices.

Improve Consistency of state's P3 Approval Process

We recommend that the Legislature adopt legislation to make the
process for reviewing and approving P3 projects consistent and
thorough across those state departments authorized to pursue such
projects. Specifically, we recommend requiring the use of the review
and approval process summarized in Figure 9 and discussed in detail
below.

Require PIAC to Approve P3 Concept and VFM Analysis.
Our above recommendations to modify the structure and
responsibilities of PIAC would make it well–suited to review and
approve a department's proposed use of P3 procurement. As shown in
Figure 9, we recommend that the Legislature require departments to
provide a VFM analysis and other relevant project information (such
as draft procurement documents) on all proposed P3 projects to PIAC.
Under our recommended process, if PIAC identifies
concerns with a P3 proposal, the commission would require the
department sponsoring the project to perform additional analyses and
resubmit the proposal for subsequent review. If a project does not
satisfy the above P3 criteria, we recommend that PIAC have the
authority to reject the use of a P3 approach, and direct the
department to use another procurement method. Thus, we recommend
that the Legislature adopt legislation directing PIAC to implement a
process to evaluate (1) whether a P3 project proposal is consistent
with the scope and cost approved in the state's current capital
outlay processes (meaning either by the Legislature or CTC) and (2)
whether using a P3 approach would be the best procurement option.

Conclusion

Based on our review of existing research, we believe that P3
procurement—if done correctly—has merit and may be the best
procurement option for some of the state's infrastructure projects.
In certain instances, sharing risks with a private partner and using
a diverse financing package (including private loans) may even be
the only way to build those projects that are both very complex and
expensive. For such projects, the use of P3 procurement can make the
price and schedule more certain by transferring various project
risks to a private partner. In addition, access to specialized
expertise and private financing could have the effect of
accelerating projects and providing other benefits to the state.
However, the state does give up considerable control over the
management and long–term funding priorities of a project that is
constructed under a P3 approach. This limitation and others must be
considered carefully when considering a decades–long partnership.

We also find that implementing certain P3 best practices
identified in the research can better ensure that the intended
benefits of P3s to the state are achieved. Thus, in order to
maximize the state's benefits from P3s, we recommend that the
Legislature take a series of steps to ensure that such best
practices are followed in developing and implementing future P3
projects. For example, we recommend specifying P3 project selection
criteria and improving the state's approval process to utilize an
entity with expertise in P3s. More importantly, our proposals to
develop P3 expertise and better evaluate potential P3 projects would
provide for a better understanding of the actual benefits and
limitations of P3 projects. Finally, as the state gains experience
with P3s, the Legislature may want to consider whether the existing
P3 authorization provided to Caltrans and AOC should be expanded to
other departments.